WestJet Airlines Ltd. was upgraded to outperform from market perform at Raymond James on evidence that the airline is creating demand by entering new regional markets and lowering fares.

Analyst Ben Cherniavsky, who left his $28 price target on the stock unchanged, also told clients that the ongoing expansion of WestJet’s Encore regional carrier represents a major threat to Porter Airlines in Eastern Canada.

Excess capacity in the Canadian airline sector has been weighing on investors’ minds for some time.

However, Mr. Cherniavsky noted WestJet’s capacity strategy is largely designed to leverage Encore’s expanding regional operations, from which as many as 50% of new guests are connecting to the mainline network.

“In the long-run, we see this as having a much different (bigger) impact on earnings growth than Air Canada’s (Rouge) capacity strategy of lowering costs by putting the same (old) planes with more seats, a new paint job, and less legroom on many of the same routes with new, lower wage, flight attendants in cute hats,” the analyst said in a report.

Using Raymond James’ database of domestic airfares, he found that the price of an advance ticket from Vancouver to Fort St. John has fallen by as much as 70% in the two years since Encore entered the market. At the same time, traffic on this route has risen 400%.

Despite the surge in traffic and capacity, Mr. Cherniavsky noted Air Canada’s post-Encore revenue on that particular route has declined by approximately $8-million, or 17%.

The analyst estimates Air Canada could lose more than $150-million in revenues on seven new destinations that he believes Encore will eventually serve out of Toronto.

Mr. Cherniavsky also suggested Porter stands to lose about $65-million in annual revenue on those seven routes.

As a result, the analyst believes it will be far more challenging for Porter to withstand Encore’s impact on pricing in the east due to its smaller size.

“If Encore eventually sweeps Porter into the dustbin of Canada’s ignominious airline failures, then the two survivors — namely, WestJet and Air Canada — will surely benefit by picking up some of the pieces — such are the dynamics of a zero-sum game,” Mr. Cherniavsky said. “Our preferred way for investors to play this possible long-term outcome is by owning WestJet’s shares.”